, Associated Content and even AOL’s Seed initiative got a lot of press a couple of weeks ago thanks to posts on ReadWriteWeb and TechCrunch about “content farms” and their pernicious effect on the web. I won’t rehash the arguments except to say that most of them are “moral” rather than practical discussions of the business of mass-produced content.
Practically, I think all three companies–particularly Demand and AC–could have bigger problems with their models that I haven’t seen anybody write about yet. These companies get their content from freelancers who write on topics posted by each company. These huge freelancer networks make it possible to deliver huge volumes of content; in Demand’s case, more than 4,000 stories and videos per day. What struck me, though, is how rigidly controlled the freelancers’ work is by the mother-ship media companies. That level of control is going to invite big tax and labour problems for Demand Media and Associated Content.
Here’s the problem: the IRS and state labour departments want company labour payments on payroll, and are constantly on the hunt for businesses that put employee costs under 1099 filings, rather than W2. Why? Because W2 payments include payroll tax withholding (like Social Security and Medicare) and ensure that businesses are contributing to workers’ comp and state unemployment funds. 1099s put the reporting and withholding burden on the employees and generally lower labour costs for a business.
So what does the level of control over the freelancers have to do with whether Demand and AC pay people via W2 or 1099? Over the past several years, the IRS and labour law have steadily tightened the requirements for who is an independent consultant or freelancer and who is not. Current tax regulations weigh 20 factors to determine if someone is an employee, and each one is subject to interpretation by the IRS. My non-legal, non-accounting sense of the relevant ones for the “content farms” are:
- (1) Instructions and (2) Training: Demand and AC provide extensive support and instructions for how to create their content and carry out assignments.
- (3) Integration and (10) Order or sequence set: These guys are content factories–the whole business is built on the integration of the content creators (i.e. freelance writers and editors) in an algorithmically optimised, tightly controlled assembly line. Take away the freelancers and there’s nothing there.
- (4) Services rendered personally and (6) Continuing relationship: Demand and AC have lots of repeat submissions and even spotlight particularly successful contributors.
- (17) Working for more than one firm at a time and (18) Making services available to the general public: I think Demand and AC have good ground to stand on here, but the IRS might not see it that way. While most contributors likely don’t make much money, and likely must work for someone else. I’ll bet that many of the contributors do neither–they’re either unemployed or not employable as writers and editors (yes, I know that many are talented consultants and freelancers).
Now, I think that Demand Media and Associated Content have defensible claims for their hiring practices–to me, the people banging out copyedits at $3.50 a story in their spare time are not generally employees–but the IRS is not going to look at the business model, they’re going to look at whether a company is avoiding tax payments. And given the recession, the IRS is going to try to get every dime it can from businesses.
Demand certainly doesn’t help its case by having both an application to become a freelancer that describes “your coworkers.” If I were a case manager at an IRS office, or an auditor at a state labour department, I’d certainly make a run at both of these guys to get a few more dollars for the state coffers.
So, any bets on when this happens? Or has it already?